Good morning. Welcome back to the session. I'm Vivek Arya from the BofA Semiconductor Semi-Cap Equipment team. Really delighted and honored to have the team from onsemi, Hassane El-Khoury, President and CEO, and Thad Trent, CFO, joining us this morning. I thought we would go through some Q&A, but if you have any questions, please feel free to raise your hand, and I'll be sure to get you in. So maybe, Hassane, I'm sure we'll discuss the macro and so forth, but I see that, you know, onsemi has been on such an interesting and unique kind of transformation journey over the last, right, 2.5 years since you joined. Maybe it'll be helpful for the audience to listen to, you know, where do you think you are on the transformation, right aspect, and how do you look at the company over the next three to five years? Sure. If you look at kind of the phases of transformation, in order for us to be able to extract and deliver value, not just shareholder value, but customer value as well, we had to focus the first few years or the first phase on structural transformation. Because we needed to establish the company as leader in the field and really have the operational efficiency in order to execute whatever comes next. If you think about what we've done over the last few years, we rationalized the portfolio. We've done a lot of investments in key technologies like silicon carbides and silicon power. We shaped up the transformation of our image sensing group as well, invested in silicon power, not just the high voltage. So from a portfolio, we exited some areas that we don't see the value that we can bring to some customers. So from that perspective, that's where we rationalized the portfolio. Right after that, we rationalized our manufacturing footprint, where we talked about Fab-Liter, having to really focus on scale manufacturing where we can extract value, and we've divested four fabs as part of that. So that puts us in a very growth market with good portfolio, good technology foundation, and a very predictable and sustainable financial model. And that's what we've achieved over the last couple of years. Looking forward, you know, we just had our Analyst Day a few weeks ago, is building on top of this strong foundation to deliver the growth, to deliver the financial performance, the profitability, and therefore, shareholder value, while we maintain our leadership in the technology to deliver that value to our customers through leadership in silicon carbide, leadership in image sensing, and a large $14 billion TAM expansion on a subset of the analog world, which is on the driver and controller, that fit very well with our strategic intent on the power. That's kind of where is left while we do the Fab Right. You know, Fab-Lite r to Fab Right, which is now take our existing very efficient footprint and make it more efficient by running better lanes or better manufacturing strategies to maximize the output and therefore, reduce the cost. Got it. We'll come back to the structural aspect, but maybe just to get the near term out of the way. What's kind of your state of the union right now in terms of looking at the demand environment now versus what your assumptions were at the start of the year? What's better or worse than what you thought before? Yeah, look, I think I'll let Thad comment on kind of how it compared. I think we are, call it, very stable. It's better than it was, I think, in the fourth quarter, if we look at, you know, push-outs and cancellations. We're taking a very cautious approach. You know, the term we use is we're puckered up. We're cautiously optimistic. You see us running the company from an inventory, you know, the things Thad we control. Right. We have very good controls as far as inventory in the channel, overall inventory. You see us taking down our utilization, so we stay ahead of what the market does. Look, if the market goes sideways for the next few quarters, we're in a great position. If the market is better than we think in the second quarter, everything we've done turns into tailwind. You know, utilization will be a tailwind for margins. Inventory in the channel will be a tailwind for demand. We are in the best place we can from the areas we control to navigate whatever the macro throws at us. Yeah, I would say, just to add on that, if you look at, you know, coming into the year, right, early last year, mid last year, you got consumer and compute get soft. We saw consumer-facing industrial get soft in Q3, Q4 timeframe. You know, I think as we were looking at reschedules, at that time, they peaked in Q4, and so far this year, they've declined, which is a good sign. I think, you know, as we entered the year, we were kind of bracing for what was gonna happen in this downturn, softness, whatever it is. I think sitting here today with reschedules actually declining, I think we feel like it's pretty stable, and we've got great visibility for the rest of the year. If you look at our LTSAs, we're still signing LTSAs up, right? I mean, we just announced the Vitesco last week. The momentum from the customers in terms of engaging long term is still very positive. Whatever the short term is gonna do, I think as Hassane said, we've positioned the company very well to come out of this, and we're continuing to manage puckered up. you know, utilizations are at 71%. We've proactively taken that down. I think we'll run the rest of this year in that range until we really start to see a recovery. I think as we look through the rest of the year, it feels pretty stable. Got it. How much of that is very, Sorry. Sorry, please, Nick. Sorry. Just a quick follow-up there. You want to just talk specifically about China and the Chinese EV market, where they're increasing growth, and whether you saw that at the start of the year, or are you saying that? Yeah, with China EVs, first of all, we're a market share gainer, right? We were late coming to the party there. As we think about China EVs, it's all upside to ours. We have seen softness, but if you think about it, we have a small base that we're actually growing on. Anything is incremental to us. We have seen some softness. I wouldn't say it's extremely bad in terms of softness, but it is softer than what they were projecting at the beginning of the year. Yeah, it doesn't impact our trajectory as far as the growth, you know, cumulative growth, because it's going to go up quarter- on- quarter because they're still building, EVs are penetrating, but we're coming off a smaller base. Now, you know, some of our peers, if you have, you know, majority share in, you know, BMS or anything like that, you will see fluctuations. We're not at that base, so we feel pretty comfortable about our outlook specific to that. Thanks. Of course. Now, specific to the automotive market, you know, one thing I think you also highlighted at Analyst Day was the ability to have that diversity, right? Whether it's on the silicon carbide side or the IGBT side, right, or with image sensors. Maybe talk about that, because I feel that, you know, it seems like people are making the whole auto EV market to just be, do you have silicon carbide or do you not? Mm-hmm. It's going to be commoditized, over time. How are you looking at your engagements, and how can you sustain the market share you have in silicon carbide? Yes, I'm gonna cover it in two areas, because specifically on the outlook of, it's gonna be commoditized. Let me cover on our positioning. The breadth of the portfolio is actually a competitive advantage. You know, we've said that, you know, 12 months ago or 18 months ago when we started the transformation, that when we engage with a customer, we engage on a solution. Because we have silicon power and silicon carbide, we don't need to be in a position to go in and say, "Well, you have to use silicon carbide." You know, you're not shoving silicon carbide in an opportunity that doesn't need it, because then it looks like it's very expensive. Right. There has to be a technology fit at a price point in order to solve at a system-level price point. It's not, you know, optimizing on silicon carbide. Which means if we're able to put silicon carbide, which is a more expensive material, but the customer gets a benefit on batteries and cooling and so on, the customer wins, so do we. That's a win-win. In some areas, we're able to achieve that with IGBT or silicon carbide, or IGBT and silicon carbide, and we are in a very unique position to be able to do both. That's on the power. If you recall from Analyst Day, there's 500 more dots on that car. Once the anchor point, which is the inverter, is decided, then, okay, there's the onboard charger, there's under-the-hood, you know, products that we do. Because when you go to EV, all of these loads that typically are run by belts, you know, in a normal engine, all these become, you know, motor controllers and discrete FETs. We benefit from all of that. Right. That's the content that we talk about when we say we're going from an ICE car to a EV car. Now, as, you know, OEMs proliferate their platforms to more lower price vehicle, but much more volume, IGBT starts to play a big role, and we are, again, in the best place because we cover both, and we've been supplying both. From an OEM perspective, they see us as the supplier of choice to service all of their platforms. They don't have to go, "Well, if I have silicon carbide, I got to go for this supplier. Now, I need IGBT, I got to find another one." One-stop shop. Right. That fits. On the comment of commodity, we do not see anywhere close to this being a commodity. There's a lot of chatter from certain, you know, peers, where the substrates may be a commodity, right? Because it's gonna be so broadly available. We're not in the market of substrates. You know, I don't sell substrates in the market. Onsemi is a product solution player. If substrates in the next 10 years get really cheap, guess what? If they get cheaper than what we can do them internally, it still went to our margin. You see what I mean? Right. It's not a detractor for the substrates to be available. As it stands today, I don't see it. We'll cover that because, I mean, we know the challenges that are to scale substrate business. It's one thing to deliver substrate, it's the other to scale it the way we have, and some of my peers will tell you how difficult it is. I'm not worried about the you know, the commodity word when it comes to the substrate because if we say our silicon carbide is accretive to our margin with our vertical integration, and somebody can do it cheaper than we can internally, great, I'll just source it from outside, and it'll be even better for my margin. You see what I mean? That's fine for us, and we'll keep targeting the market, and we'll keep investing. Also, from a strategy perspective, you can't go one way or the other. We have internal. It is the strategic thing we provide to our customers. They value vertical integration. In what world am I or any of our sales team will go to a customer and say, "Yeah, we got a supply resiliency plan. It's a 100% sourced in China. ... you know, an offset. Right. Got it. On the, having internal capacity, I think you said that sitting this year, the goal is to be 50% internal, right? More than 50%. It'll be more than 50. More than 50% internal. Where does the move to 200mm come in? I think you've also mentioned that, you know, over some time. Do you think a competitor who has access to 200mm has a cost advantage over Onsemi? I don't think so, because to go do 8-inch or to do 200mm, you have to do it right. All I can say is, who's better and who's not? Just look at the margin profile. Look at the margin profile and revenue and wins. It tells you who's doing it better. You know, talking about, well, 8-inch or 200mm is going to be much better competitive advantage versus 6-inch. Today, our 6-inch is yielding better than anybody out there, and our results show that, right? Right. Versus their results, without naming names. We have said our 8-inch, we're on track to introduce our 8-inch in 2024, so next year, with a production or revenue in 2025. We said that 12 months ago, we're still on that track, and we're delivering to that. We're sampling, we're running 8-inch already today, and our conversion to six to eight is pretty straightforward, because the fab we run 6-inch SiC in it, is the same fab that runs 8-inch power today. We don't have the challenge of ramping a new fab from six to eight. No big CapEx. No, it's, you know, it's a conversion CapEx. The conversion CapEx is primarily on the furnace side. Right. Where it's not even the furnace, it's just the heater core. Everything else is already 8-inch capable. That's why, for us, when we're ready, we're just gonna start running concurrently, 8-inch and 6-inch, and then over time, just keep converting to 8-inch. That is the best from a risk mitigation, that's the best approach to ramp a conversion to 8-inch, while ramping hard on the revenue ramp that we've talked about, the 70% year-on-year CAGR, or, 70% for the next five-year CAGR. Got it. One thing on the long-term supply agreements, Hassane, autos is a dynamic market, right? EVs is even a more dynamic market. If most of your customers don't know how many EVs they will produce in a given year, right? Whether they will be successful or not, how can they give that certainty to you in terms of an LTSA? Yeah, a lot of our LTSAs are platform wins. Maybe the customer doesn't know, you know, the blue model is not going to work, but the model B is gonna be better, or the model C is gonna be, you know, introduced. If they're all on the same platform, the customer is able to change the mix. Which is again, why we from a platform perspective, you know, the scalability of our inverter design and our approach that Simon talked about in Analyst Day, is actually competitive advantage, because exactly that. Right. Look, the customer can introduce a vehicle, and all of a sudden, a lot of people wanna buy it at the expense of the next vehicle. Right. They wanna be able to spring capacity and change the mix. Our scalable approach to the design is actually a benefit for them to be able to do that. The worst thing you can do is, you introduce a vehicle, it takes off and you're constrained. You just killed your own success. They wanna be able to do that mix across, and we're able to provide that to them. That's a competitive advantage. That's why we've been getting the LTSA. That's why customers don't hesitate giving us the LTSA, because they see that flexibility that they can use to their advantage. Do you think that, you know, we see a lot of OEM announcements, right? Most of them have tended to dual source, right? Right, you and your European, right, peer in most situations. Do you think those are exclusive by platform? Or, like, are you exclusive on a platform basis, or, you know, they are dual sourcing on a platform basis? It's by platform. Meaning, it is exclusive by platform. Okay. Some of the wins, for example... Look, I'll acknowledge, three years ago, we weren't in the market. onsemi was not in the market. Therefore, some of the designs that are ramping with certain OEMs are designed in three, four years ago. Right. Although you may see the same logo being announced by us or prior by one of our peers, some of it is new platforms that the OEMs are introducing, and some of them are platform shifts that we have seen. We've seen that accelerate a little bit in the last two quarters. Just because OEMs are starting to realize it's not a slam dunk, and they wanna go with a slam dunk supplier that is able to supply. That has shifted a little bit. Obviously, it doesn't change 2023 because we've been, you know, sold out. That from an LTSA perspective, that has given us a different outlook, a more favorable outlook. It is because the customer is not going to say: Okay, I'm going to swap modules on the same inverter, because then you end up with a different performance. Right. Right? Because we have, and I've always said, we have better performance on a platform than our peers. That's why we win the platform. Having a dual source with somebody you just won against on performance, then you're gonna end up with the same platform with two performances. They separate by platform. Got it. One last one on silicon carbide and competition. One of your competitors, right, they're facing some challenges in scaling the material side, you know, but they have this really nice, large, right, device factory. You think, let's assume they are able to overcome those challenges, then should investors be concerned that there could be a flood of you know, capacity on the device side, that that comes into the industry? Or you think that that's not a concern as far as you're concerned? Look, that's not a concern where I sit, because all of our designs are LTSAs, and most of the LTSAs were signed when they didn't have an issue. You see what I mean? Right. A lot of LTSAs that we had, you know, beginning of 2022, before all the issues from our peer started surfacing, were irrelevant. You know what I mean? Right. We got the LTSAs because of the performance. Again, it's not because, oh, supply. You have to meet performance. It doesn't matter if you can make all the silicon carbide in the world, if you don't hit the performance targets in order for silicon carbide to be justified versus silicon- Right. It doesn't matter how many wafers you got. Right. We've been winning on performance. We've been winning on performance of our die and the performance of our package together. That's a competitive advantage. That's why we've been winning, and that's why we have the LTSAs. You know, I don't know what specific issues are over there. Whether or not they work it out, that's their execution, but it's not gonna change the trajectory we're in. I said it may modify it a little bit on where customers go, "Yeah, we're just gonna shift share." That goes into our LTSAs, but it's not gonna change whether and how fast and how aggressive we win. We put a target of 35%-40% market share. That assumes not somebody failing, that assumes us delivering and executing, which I have full confidence we will execute. Got it. Then on that market share goal, right, I think you are sort of in that share right now, right? Your European Tier one is in, around that, you know, share right now. Do you think looking out, you know, five, six, seven years, that this becomes that kind of, you know, two, three players controlling 80%, 90%, or you think it's going to be a lot more fragmented industry? It's not gonna be fragmented. It's gonna be a handful that navigate it. You know, in the short term, call it the next five, 10 years. Right. EVs are only gonna be 50% penetrated. Right. -in total SAR. The runway, you can think about it as, you know, 20-year runway by the time you get full EV penetration. As, you know, that maturity and the penetration starts coming in, there's going to be less and less. Look, there's one that's already starting to drop out. Right. Sell down. Where they're doing it all, because, look, the barrier of entry is high. Unless you can scale and scale very quickly, you're just not gonna be a laggard. In that business, with the CapEx intensity, you can't be a laggard. The way we're doing it, you know, we got best-in-class ROIC. We believe in the way we have the model to invest. We have always said we invest in brownfield, which is more efficient. Our ROIC shows it, our gross margin shows it. We're performing financially better than anybody else in that market. Right. All that matters in the sustainability of that investment. We do see this as a very small market as far as players. Kind of like the IGBT, if you look at it. Right. It'll work itself out, and we're gonna be the leader in there. Got it. Vivian, you had a question? Yeah, a couple of questions. I just wondered, from a business model standpoint, like, vehicle inverters, do you think that your direct relationship with those OEMs is going to be the way forward, e.g., the OEMs start to you know, in-source inverter? Or do you think the Tier ones still have a major role to play? Related to that, I was particularly interested in the contract you've signed with Vitesco, and not only a multi-year supply agreement, but also the sort of, being paid $250 million upfront to finance your CapEx. Do you think that could be the norm going forward, where your customers are effectively underwriting your capital investments? Yeah. On, on, the first part of the question, the OEM, the answer is yes, because the inverter is the main thing that is distinctive for how the vehicle performs, which is the identity of the OEM, right? The OEMs never outsources the engine today, you know, to somebody, and be like: Just give me the engine that you give everybody else. It's a core differentiator. inverter is gonna be the same. The other thing is, doing the right inverter for that platform will save on battery volume. You know, if you have 10% more efficiency, you have 10% less volume of battery. That's a slam dunk win for the OEM from a cost or extended range. The OEM is the core decision maker for the technology of the inverter. Whether they in-source it or not, that's dependent on the OEM and the scale they can. Not all OEMs can take that on. Where we sit, and the engagement we have directly with the OEM, allows us to service both, meaning if the OEM does it, we deal with the OEM directly, or it could be directed by, the OEM already made the platform selection and the technology selection, and then they say: "Okay, we awarded it to this Tier one, now you all work together to deliver." The anchor decision is already made by the OEM. That, to me, is how the business looks like. On the what I would call the go-to-market look, we've talked about, I think, three, four quarters ago, where we've had co-investments with customers.... This is the main one we publicly stated in agreement with Vitesco as a partner. That model, we've been executing to already, and we've already, you know, had co-investments. That's important. Look, we can afford the CapEx, right? Why is that important, is the stickiness of it. Especially on the ones that, you know, outside of Vitesco, where we signed in the midst of the shortages, and, you know, customers were contributing or co-investing with us, not necessarily on a them procuring the equipment, but co-investment in order to get a capacity reservation. What that does, as you go through these uncertainties, the customer is gonna go, "Yeah, well, I'm gonna move more share to Onsemi because I already invested in it, so I wanna maximize the investment." You get majority of the share if the demand goes down. We've seen already that that's why we always say we're shielded from a lot of the fluctuations, because our customers value what we bring and have been moving in a win-win situation. You know, we get the call six months before the demand is soft, and say, "Hey, I see this, you know. I may not need all of it. What else can we do?" We have that conversation, and we end up with a win-win, and that's what's been helping us navigate through this uncertain times. We've been building the capacity to support the LTSAs. If you think about any new awards that we get require additional capacity, so that's why we've got customers co-investing with us to build out that capacity. You know, these LTSAs are, you know, on average, five years, but some go out nine, 10 years. That gives you a little bit insight, you know, on a secondary, verdict on our technology. Right. You know, when a supplier like Vitesco, which a very credible, at scale, even inverter EV supplier, signing up for 10 years and investing, they've done the work about which technology is the best. You know what I mean? That's credit to what we've been talking about as far as superior technology, efficiency, and then the joint die and package combination. Maybe one thing, Hassane, outside of silicon carbide, how is the demand outlook for other parts of your automotive business? Yeah, I'd say it's stable. Right? Get where our Street numbers are for 2023, and you exclude silicon carbide, you know, you got the rest of the business, the base business. If you exclude the exits of $400 million, you got the base business that's growing kind of flat to low single digits. That feels good right now in an uncertain world. That's why we keep saying it looks stable. We look at our, our LTSAs, we look at our reschedules, and everything kind of feels good right there. I would say the non-silicon carbide automotive is a stable road right now, is what we can say. Okay. On gross margins, right, it's a very strong journey. I mean, we were used to seeing Onsemi at 36%. You know, now we are at, like, 46%, 47%. 36 now is the EBIT. Is the new EBIT? No, that's a great accomplishment. How is the journey from here to the long-term 53% goal that you set at Analyst Day? Yeah, there's three components, right? you know, 2023 is a transition year. We've been very clear on that. If you look at 2022, for the year, we came in at 49.2% gross margin for the year. 2023 is a transition year because we're ramping silicon carbide. That's got a headwind of 100-200 basis points. We brought in the EFK fab, and that's got a headwind as well. We believe by the time we get to 2024, we've got scale on silicon carbide. That rolls off. There's three components to get from, what's called 49- 53. It's the ramping silicon carbide, that is, you know, line of sight to get there. It is the favorable mix, and there's two components of that. If you look at the growth rates we've outlined, it's more automotive and industrial, so you have a mix to a higher margin. You've got new products that come in, right? We talked about new opportunities. We talked about growth opportunities and gate drivers and controllers. As that layers in, that helps drive that gross margin. The third component is the Fab Right, right? It's optimizing the footprint that we have now, getting the right mix of the right products where we get the optimal cost structure, as well as monetizing the fab divestitures. There's $160 million of annualized cost that comes out as we exit those fabs. We've divested them. We still have production running through there, but as we bring that in-house or somewhere else, we actually save $160 million on an annualized basis. You got Fab Right, silicon carbide, and favorable mix that get us to that 53%. We don't think there's gonna be a step function in that ramp. We think it's probably more of a linear, kind of, gradual improvement over time, because obviously, the mix takes a little bit of time, and the other parts just take time to monetize. Anything on use of cash? like, is M&A on the table at all, or you see that as a secondary, part of the strategy right now? Yeah, look, from. You're right, we have a very good position to do, whether it's M&A or, you know, our capital return policy in the order where M&A is secondary to our own business, if you will. The reason I say this is it's definitely on the table, but what we've outlined at Analyst Day for the next five years is not contingent upon a missing piece, meaning we have everything we need to deliver to our strategy and the five-year plan that we've put together and the growth that we've outlined. We have all the pieces we need. We have the technology. Nothing is lacking. What that means is we can be very disciplined in our M&A approach. You know, we have the scale, so we don't need anything for scale. We have a lot of technologies. What you're gonna see us do is, you know, we will use our M&A and our firepower to do, for example, a technology tuck-in that will accelerate an R&D development that we already have, or gets us to market faster, or gives us a the TAM expansion beyond where we are. It has to be a strategic M&A in order to deliver better than we can, based on what we've outlined, but nothing is missing today from what we've outlined for us to deliver. It's like the best place to be in, because that's where you can be very disciplined, both on timing and value. Still auto industry, right? You're not making AI accelerators anytime soon. No. That's perfect. We, you know, for all the AI hype and all the AI accelerators, they all need power because they're all power hungry, which even puts more importance on the efficiency of the power ICs that Sudhir talked about in Analyst Day. You know, 1% efficiency on that much power goes a long way from power consumption and sustainability, right, on the usage model. We're definitely gonna be part, are and will continue to participate from a power domain aspect to this. Thank you, Hassane. Thank you, Thad. Absolutely. Thank you. Thank you. Thanks, everyone.